Published April 22, 2009

SIAEC likely to see its strongest growth overseas

By VEN SREENIVASAN

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IN A move which placed it at the heart of the only growth market in global aviation, SIA Engineering (SIAEC) last week inked another deal with a resurgent Bahrain-based Gulf Air. The contract, worth US$35 million for the maintenance of five aircraft, is an extension of an existing three-year fleet management programme (FMP) worth US$100 million.

Mr Tan: Expects fleet management deals to exceed 200 planes soon

That earlier deal, to manage 29 planes, was negotiated in February 2008 and signed almost four weeks ago. With the latest contract, SIAEC now has a US$135 million contract to manage 34 Gulf Air planes. But what is more important than the size of the contract is its strategic importance for SIAEC.

Bahrain sits at the heart of the Middle East, next to the region's biggest economy, Saudi Arabia. This is a region of the world which is the bright spot in the otherwise badly beaten global commercial aviation market. As SIAEC chairman Stephen Lee noted Gulf Air was the company's first venture in the region.

But it could also be a platform for SIAEC to broaden its footprint in this promising market.

Middle East airlines have some of the biggest plane orders in the world, and have continued placing new orders despite the global financial crunch and delivery delays by planemakers. As of January this year, the region's carriers had had some 1,042 planes on order.

Gulf Air itself has almost 60 more planes on order. More importantly, this deal comes at a time when SIAEC's parent, Singapore Airlines, is cutting capacity sharply in the wake of the economic firestorm.

SIAEC, which is 80 per cent owned by SIA, provides maintenance, repair and overhaul services for more than 80 international carriers at Changi Airport.

But the company has also been rapidly growing its international footprint. It has 23 ventures in nine countries, which account for 30 per cent of its revenue and 50 per cent of its profit. Currently, 65 per cent of SIAEC's profit comes from non-SIA business.

This is poised to grow. And the key reason for this is the company's increasing emphasis on fleet management. The fleet management programme, which SIAEC rolled out about two years ago, essentially provides an entire suite of technical services to aircraft operators, ranging from engineering management and technical maintenance, to inventory management and planning services around the clock.

It is higher value added than the regular MRO services which many of its global competitors provide.

SIAEC now has nine global FMP customers with a total of 175 planes, of which 111 are already in service. This is larger than the entire SIA fleet. SIAEC's CEO William Tan envisages his company's FMP fleet surpassing 200 planes soon as more customers sign on in a bid to outsource services and keep overhead low amid the poor operating conditions.

SIAEC's ability to capitalise on the FMP niche is largely due to the first-mover advantage it has built up over the past few years through its investments in infrastructure and human resources. Today, it is one of only a handful of global players with the ability to provide end-to-end life-cycle fleet maintenance solutions through its tie-ups with OEM aircraft manufacturers like Boeing and Airbus.

In Singapore, SIAEC has invested more than $500 million in 13 joint ventures including critical partnerships with 'big boys' like Rolls-Royce, Pratt & Whitney and Hamilton Sundstrand.

But as the latest Gulf Air deal show, it is overseas where the company will see its strongest growth, going forward. And the ability to boost its external wing is critical under current tough industry operating conditions. For the nine months to end-December, SIAEC reported a net profit of $195 million, which was about 2 per cent down from a year earlier.

Most analysts expect Q4 revenue to be weaker, resulting in a drop in profit for the full year. And going forward, the operating environment remains challenging. But what will be interesting to see will be how SIAEC manages to boost its offshore/joint ventures/non-SIA business. Associate and joint-venture contributions rose 10 per cent to $42 million during the October-December third quarter, accounting for almost 60 per cent of group pre-tax profit.

If this number continues taking off, it will mark the coming of age of SIAEC as a truly independent global MRO giant, notwithstanding the fact that its main shareholder is still SIA.